The stock market has been on the roll since COVID-19. The winning spree is so long that everybody becomes a financial influencer. They thought that they had cracked the code. People started thinking that too much money could be made in the stock market in the short term. There has been a new breed of traders who have become social media stars. They show their trading P&L and entice people to join their course.
When there is too much exuberance, there is only one thing certain. Crash… The question is not, if a crash will happen. The question is when and how much?
Looking at my friends, who were making a killing in trading, I also got carried away. I started thinking, if these people with average intelligence can make good money by reading charts, why can’t I? So I tried my hands.
My earlier attempts at trading were pretty bad, so this time I was cautious. After watching several videos, I thought of trying hands in ETF trading first. Considering ETF as a zero risk option (as these YouTube influencers say…), I learned several strategies by watching YouTube videos. Then decided to use a rotation strategy. The strategy was pretty simple. Investing in top 10 ETFs. Book profit as soon as 3% gains are achieved. Then reinvest in another ETF. If ETF drops more than 3%, then invest again in the same ETF to average out.
For the initial few months, the strategy was profitable. Since I was putting smaller amounts, the profits were also smaller. My plan was to increase the bet size, once I achieved a certain degree of confidence.
Then came October 2024 and stock market started falling every day, like crazy. For the initial few days, I was ecstatic, as I was getting ETFs at cheaper value (as they say…). So I slowly invested to average out. But when the market kept on falling, I stopped investing. Needless to say, I was out of money.
In October month, the market fell by about 10%. My portfolio of ETFs fell even higher. Now I have the first-hand learning of investing in risky securities. I used to think I could bear a 10%-20% fall in the market without getting emotional. It is easier said than done. How can you keep calm when you see your portfolio falling every day? If you keep a daily watch on the stock market and your portfolio, you will be automatically pushed to take some action. This is called emotional instability.
One needs to have a sage-like mentality or mental conditioning of keeping calm and not reacting, even after seeing a bloodbath in the market every day.
Another issue was keeping a very low emergency fund. My take was to remain invested in equity so as to take benefit of rising market rather than keeping money in fixed deposit and earning below-inflation returns. So, I needed money immediately for some urgent work. And I had to sell a part of my investments at a loss. Though it was very small part of the investment. Still, it was quite painful to liquidate investments at a loss.
My learnings:
- Trading is not for me. Stop trading in ETFs
- Invest in mutual fund index funds. These vehicles avoid quick buying and selling. They keep your mind in check for emotional control.
- Keep a good amount of emergency funds. The ideal recommendation is to keep a 6-month emergency fund. I will start from 2-3 months.
- We always overestimate our ability to withstand notional losses.
- Finally, do not sell. Remember, Stock market is voting machine in short term and weighing machine in long term.
Happy Investing.